Advantages And Disadvantages Of Shadow Banking

2.1.4 Advantages and disadvantages of shadow banking for the market? for investors?

There are both supporters and critics of shadow banking. The following lists the advantages and disadvantages of the shadow banking system.

Pro’s:

They can often operate more cheaply than formal banks and therefore provide the loans under better conditions. This acts to support economic growth.

Normal bank loans are much safer, but that makes them also more expensive. Lower yields and higher fees.

Because they are not subject to heavy regulation they can also offer services that banks are not able or are not willing to.

Con’s:

The flexibility and price competitiveness that shadow banking offers does not come without a cost. These costs include;

Much lower

Private investors will get a much higher return than they would receive on a normal time deposit.

2.1.6. What is the role of Shadow Banking in China’s developing economy?

Shadow banking in China has grown significantly since the early 2000s. The genesis of shadow banking in China differs from that of its economic counterparts, namely the US. In China shadow banking developed as a means to bypass regulatory controls around interest rates and other limits on market based finance. In the US conversely, the role of shadow banking was to push the boundaries, exploit the lack of regulation and profit.

Shadow banking really accelerated in China when small business and entreprenuers began popping up. Shadow banking allowed these borrowers access to funds even though they were smaller than offcial state policy allows for borrowing through retail banks. The backbone of the system’s importance in China is this ability to fund a new pool of investors and borrowers, eager to profit from China’s transition to a market based economy.

It is very difficult to precisley estimate the size of shadow banking in China as defintions of shadow banking differ greatly amongst companies, markets and

Research has shown that the Chinese formal banking sector has a significant stake in the shadow banking industry. This stake appears in different forms, but we wil consider two. Firstly, formal banks make on-balance finance available directly to non-bank financial institutions who use the money directly for shadow banking activities. Secondly, some banks and their affiliates have ownerships in trusts companies or other non-bank financial institutions which offer shadow banking services. Hence, commercial banks are not only financing the shadow banking industry, they also have a big part in the ownership of these shadow banking institutions. These stakes bring with them a host of conflicts of interest as well as affirming the need to ensure a sustainable shadow banking system in China, as if the system were to fail, the commercial banks wil be directly damaged as